Should you buy euro funds?

This week Citywire picks out three European funds for Isa investors prepared
to face the risks.

Is it time to fly the flag for Europe in your portfolio?Photo: Alamy

By Gavin Lumsden, Citywire Money

8:36AM GMT 01 Mar 2012

Are you brave enough to consider investing some of your Isa money in Europe? With the €130bn (£110bn) bail-out for Greece approved last week, we're looking at three of our favourite European funds from Citywire Selection.

If you think investing in Europe sounds mad right now, you might be right, but bear in mind that the best returns go to those intrepid souls who invest when others are too scared to.

Although European stock markets surged by as much as 8pc last month as confidence that the eurozone was getting to grips with the debt crisis grew, share prices on the Continent remain low after their battering last year.

Buying into a market when it is undervalued is the best way to achieve good long-term returns. However, it does not mean you will get a smooth ride.

The fear is that this is just another chapter in Europe's debt crisis, not an end to the five-year saga. Critics say the rally in January was fired off by the "Draghi Bazooka", a reference to the wall of cheap money that Mario Draghi, the European Central Bank president, offered banks in December.

Investment opinion is divided over whether the second bail-out of Greece in two years really is a turning point. Philip Poole, head of investment strategy at HSBC Asset Management, believes it is "a milestone" which should avoid the threat of a "disorderly default" by Greece, which would plunge Europe back into crisis.

However, Mr Poole concedes that even though Greece's bond holders have had their arms twisted into writing off at least half of what they were owed, the country faces a huge challenge repaying its remaining debts with an economy mired in a recession.

Dominic Rossi, chief investment officer of Fidelity Worldwide, thinks Greece will eventually be forced out of the euro and that the pressure on Portugal, Spain and Italy to follow suit will become intense. If global stock markets continue to rally, Mr Rossi said, "it will be driven by further positive news from the United States and China rather than developments from within Europe".

With so much uncertainty we have highlighted three funds taking different approaches to investing in Europe.

Neptune European Opportunities

This fund takes a more defensive position than some rivals. Manager Rob Burnett remains cautious about the European banking sector, believing that Mr Draghi could disappoint markets about the size of future loan facilities. Consequently Mr Burnett does not think Europe will start an economic recovery at this point. The fund has grown by 5pc in the past five years, which puts it towards the top of its sector, and by 26pc in the past three.

Jonathan Miller, head of research at Citywire, said: ''Even though European equities have rallied so far this year, Mr Burnett is in defensive mode and biding his time before moving into stocks that would benefit from a cyclical recovery."

BlackRock European Dynamic

This is a higher-risk fund. Alister Hibbert, the fund's manager, has earned a top AAA Citywire rating for his ability to fall with the markets but to race ahead when they recover. His fund has captured the recent rally and has returned over 70pc growth in the past three years, although its five-year return is lower at 38pc.

The fund avoids the troubled "peripheral" countries of southern Europe to focus on Germany, Switzerland and northern Europe. Consumer goods and services companies make up around half of its investments, with Nestlé its biggest holding.

Mr Miller said: "This fund tends to be more volatile than its index, but offers strong potential for long-term outperformance. Although markets are likely to remain turbulent Mr Hibbert is backing companies whose growth is led by international demand."

Montanaro European Smaller Companies

Our highest-risk choice is this investment trust focusing on the shares of smaller European companies. Its share price has soared by 82pc in the past three years, although over five years the shareholder return has been 3pc.

Fund manager Charles Montanaro thinks markets will pause for breath but remains optimistic for the year ahead. His largest holding is in Rational, a German manufacturer of ovens and kitchen equipment. The trust's share price trades 14pc below the value of its investments.

Mr Miller said: "The trust's discount has recently widened and, although this is a punchy pick, it offers an attractive entry point for contrarian investors."